Turkey Set for Rate Pause After Serial Hikes: Decision Day Guide

A woman shops for fruit and vegetables at the Sisli market in Istanbul, Turkey.  Photographer: Burak Kara/Getty Images
A woman shops for fruit and vegetables at the Sisli market in Istanbul, Turkey. Photographer: Burak Kara/Getty Images

(Bloomberg) -- Turkey’s central bank is set to leave its benchmark interest rate unchanged at the first monetary policy meeting of the year, after two consecutive interest-rate hikes bolstered its inflation-fighting credentials.

All but six respondents in a Bloomberg survey of 29 analysts expect the central bank to keep the one-week repo policy rate at 17% on Thursday. The dissenters, including economists at Morgan Stanley and Societe Generale SA, predict an increase of 50-to-100 basis points.

Governor Naci Agbal has raised the benchmark by a cumulative 675 basis points in two meetings since his appointment in November, bringing inflation-adjusted rates to well above yields offered by emerging market peers. His decisions to simplify the bank’s funding structure and end unannounced foreign-exchange interventions by state lenders have earned him enough credit to avoid another rate hike despite last month’s jump in inflation.

“We do not see any fundamental reason for higher rates,” JPMorgan Chase & Co. analysts including Yarkin Cebeci wrote in a report, citing higher central bank credibility and a stable lira. Cebeci expects the next step to be a 100-basis-point cut in the second quarter, but the exact timing “is strictly conditional” on weaker domestic demand and inflationary pressures, as well as a stable local currency.

The Turkish Treasury’s $3.5 billion Eurobond sale this week before the central bank meeting provides added reassurance for analysts expecting a rate pause.

The issuance “suggests the central bank will not increase interest rates, in line with our expectations,” said Evren Kirikoglu, an independent market strategist in Istanbul. If policy makers were considering a hike, they “could have chosen to issue the debt after a retreat in exchange rates and risk premium” following the rates decision, he said.

Erdogan Factor

Investors remain skeptical about President Recep Tayyip Erdogan’s pledges to follow orthodox policies after his son-in-law Berat Albayrak resigned as economy czar in November. Under Albayrak’s watch, Turkey restricted banks’ lira trade with international institutions while aggressively cutting borrowing costs, triggering a $34-billion outflow of foreign capital from Turkish equities and government bonds.

The Turkish leader provided further ammunition to skeptics last week when he resumed his criticism of high interest rates, reiterating his unorthodox economic theory that they are responsible for inflation.

Erdogan Bashes Interest Rates, Saying They Bring Inflation (1)

The central bank should respond to “the damaging impact of rhetoric from Turkey’s political leadership,” according to Phoenix Kalen, London-based director of emerging-market strategy at Societe Generale, who penciled in a 50-basis-point hike. “We believe the governor will want to demonstrate that the Turkish central bank remains committed to a more orthodox, inflation-targeting policy course,” she said.

Turkey’s central bank has consistently missed its inflation target since setting it at 5% in 2012. Last year, consumer inflation exceeded even the central bank’s bumped-up forecast, climbing to 14.6% in December. A weak lira and rapid credit growth driven by negative real-interest rates kept the rate of price growth in double digits during 2020.

Elevated levels of inflation boost Turkish consumers’ preference for dollar-based assets to protect their savings. In 2020, Turkish residents’ foreign-exchange deposits rose by about 22% to $235.7 billion, following a 20% increase the previous year. Strong demand for dollars weakens the lira, creating additional rounds of inflationary pressures.